Effect of Capital Structure on the Relationship Between Corporate Governance and Corporate Value of Companies Listed at the Nairobi Securities Exchange

David Onguka ,Cyrus Iraya ,Winnie Nyamute

doi:10.7176/rjfa/11-17-10

Abstract

The capital market authorities of different areas have from time to time issued regulations and guidelines for good corporate governance practices ensuring thorough and proper management of listed companies to align the interest of all stakeholders, ensure firm sustainability, and optimize corporate value. Despite these interventions, cases of corporate underperformance and failures attributed to financial distress and governance weakness continue to increase in magnitude and frequency. The main objective of the study was to determine the intervening effect of capital structure on the relationship between corporate governance and corporate value of companies listed at the Nairobi Security Exchange (NSE). The study tests hypothesis that there is no intervening effect on the capital structure on the relationship between corporate governance and corporate value for companies listed at the NSE. The key theories underpinning the study were agency theory as the main guiding theory and the trade-off theory. The data was acquired from past audited financial statements of companies listed at the NSE. The study used a census survey for sixty-four listed companies at the NSE. The analysis covered a period of five years between 2013 and 2017. Corporate Governance was measured by a composite of Board Independence, Board Size, Board Composition, and Corporate Gender Diversity. Capital structured was measured by leverage Different performance metrics have been used to evaluate corporate value worldwide by regulators and scholars. This study used Tobin - Q which has become an important tool for measuring corporate performance due to its incorporation of the market value of shares in its computation. The study adopts a positivism research philosophy and descriptive design. Descriptive statistics and diagnostic tests were conducted on the data thereafter inferential statistics namely correlations analysis and regression analysis were used to test the hypothesis. The panel data procedure was considered more appropriate as the sample data contained both cross-sectional and time-series data. The diagnostics tests were used to test for bias in the model and the regression used to test the strength and direction of the variables. Baron and Kenny (1986) approach was used to test the intervening effect of capital structure on the relationship between corporate governance and corporate value. The finding was that capital structure had no significant intervening effects on the relationship between corporate governance and corporate value. This research contributes to the line of literature that examines the desirability of corporate governance in enhancing corporate value. These insights in explaining corporate governance, capital structure, and corporate value relationships are useful for academic understanding and business and public policy formulations. Keywords: Corporate governance, capital structure, agency theory, trade off theory, corporate value. DOI: 10.7176/RJFA/11-17-10 Publication date: October 31 st 2020

Highlights

If buyers and primary producers could locate each other efficiently, purchase or process any or all needed items and services at no transaction cost and make their decisions with freely available information corporations would have little or no scope for mediating these direct transactions
1.6 Research Objective To assess the effect of capital structure on the relationship between corporate governance and corporate value of Nairobi Security Exchange (NSE) listed firms. . 2 Literature Review 2.1 Agency Theory This theory was advanced by Jensen and Meckling (1976) who argue that separation of ownership from control creates an agency problem whereby the management operating the company to satisfy their interest and not necessarily that of the owners
3.2 Research Design Research design is a scheme used to guide a research study to enable the study to address the research problem. It is the structure of research; it is the glue that holds all elements of the research project together

Summary

Introduction

If buyers and primary producers could locate each other efficiently, purchase or process any or all needed items and services at no transaction cost and make their decisions with freely available information corporations would have little or no scope for mediating these direct transactions. Corporate governance and the choice of the capital structure may help mitigate these agency costs It is an important factor in improving the value and performance of the firm and the impact differs from country to country because of different structures resulting from dissimilar social, economic, and regulatory conditions. Due to the inconclusiveness and extreme findings from the studies that have already been done, there is a need to do more research to ascertain the influence capital structure has on the relationship between corporate governance and corporate value of listed firms. 1.6 Research Objective To assess the effect of capital structure on the relationship between corporate governance and corporate value of NSE listed firms. Intervention occurs when Corporate Governance predicts Corporate Value, Corporate Governance predicts Capital Structure, Capital Structure predicts Corporate Value and still, Corporate Governance predicts Corporate Value when Capital Structure is in the model

Descriptive statistics

Results of Diagnostic Tests

Correlation Analysis